Covid third wave to have low impact on NBFCs’ collection efficiency: Report

Non-banking finance companies (NBFCs) are likely to face minimal impact on their collection efficiency due to the ongoing third wave of Covid-19, India Ratings & Research said in a report on Friday. However, analysts cautioned about a rise in NBFCs’ non-performing assets (NPAs) in 2022, primarily emanating from the micro, small and medium enterprise (MSME) and low-ticket loans. 

“The probability of a severe nationwide lockdown, at the moment, seems low with restrictions being imposed at the regional level. In the absence of any restrictions, the impact on the cash flow of NBFC borrowers may remain modest,” India Ratings said.

It said NBFCs navigated the periods of business disruptions during the first two Covid-19 waves by tweaking processes, digitising certain operations, restricting operating hours and physical movement, slowing down disbursements, focusing on collections and vaccinating their staff.

Latest collection efficiency data points to a recovery in the overall operating environment, as per the rating agency. The commercial vehicle segment, where collection efficiencies fell 60-70% during April-June, has recovered and is close to the pre-pandemic level. On the microfinance loans front, collection efficiency had declined 20-25% during the second wave and has significantly recovered since then. Delinquencies in the 1-90 days past due bucket continue to be in the range of 5-15%, with the transition to the subsequent buckets slowing down materially.

In a pre-earnings report on Tuesday, brokerage Emkay Global Financial Services said it expects collection efficiency for NBFCs to be in the 95-100% range. The brokerage expects disbursement growth of 13% on a sequential basis for Shriram Transport Finance, driven by used commercial vehicle sales, and 10% quarter-on-quarter rise for Cholamandalam Finance.

Even as NBFCs’ collection efficiencies are likely to remain stable in absence of major lockdowns, global rating agency Fitch on Thursday said it expects deteriorating asset quality for Indian NBFCs in 2022, stemming primarily from MSME, microfinance loans and property construction finance.

“Fitch expects stresses in the MSME and microfinance segments to culminate in higher NPLs (non-performing loans), particularly as tightened impairment recognition norms come into effect by March 2022. Many lenders with greater exposures in these fields tend to be smaller and reliant on bank funding and could face funding pressures due to sustained risk-aversion among banks,” it said. The rating agency said authorities will likely step in with further forbearance if impairments climb too quickly.

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